Should the EU issue a digital euro?

Regarding whether the EU should issue a digital currency, experts from relevant countries delivered a keynote speech at THE EUROPA THINK TANK'S WEBINAR, clarifying the terminology of the digital euro and pointing out the existing controversies and challenges.

Is the term "digital euro" used?

The authors suggest that the term "digital euro" misses the essence of the problem. The ECB issues a lot of digital currency (or call it a deposit account), the new feature is not the digital aspect, but whether private and non-financial companies should have a deposit account (or something similar to a deposit account) directly to the central bank .  The most correct expression is "retail CBDC", that is: a central bank digital currency for retail customers.

Introduction of Threshold Mechanism

The ECB report proposes that a threshold will be introduced, probably around 3,000 euros, or just over 20,000 crowns, the maximum amount that can be deposited in the account.  This will require a mechanism to automatically transfer any excess amounts to a private deposit account that would cause the cap to be exceeded.  The threshold is to avoid mass transfers of deposits from private banks to the ECB, which may not be a major problem under normal circumstances but can exacerbate financial crises in times of stress.  The question is whether there will be political or public pressure in times of particularly severe crises to increase the ceiling when crises occur.

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Account Management Delegation

The management of the account will be entrusted to the private bank.  In other words, the ECB doesn't want to manage hundreds of millions of deposit accounts when they have the responsibility to manage credit transfers and customer inquiries and know your customers and comply with anti-money laundering rules and things like that.  Central banks have neither the expertise nor the capacity to conduct retail transactions. When a customer logs into the regular online banking service, an account similar to the customer's other accounts will be shown, with a minimum payment of 3,000 euros and a direct claim to the ECB (rather than being secured by a margin).  A shareholder account in Denmark looks a lot like this: there is a threshold for a shareholder to transfer some of his shares to a shareholder account if the circumstances are favorable.

European Commission official: Not competition between public and private digital currency solutions: Eric Ducoulombier, Head of Retail Financial Services and Payments at the European Commission, spoke about the potential for digital currencies and a digital euro during a webinar on "Retail Payments Strategies" on Wednesday. future. With the ECB's recent discussions and public consultations on the possible creation of a digital euro, Ducoulombier emphasized the role that the private sector should play: "Digital euro solutions should not crowd out solutions from the private sector. The ECB report emphasizes that such solutions It will be a complement from the private sector and there should be no hostility or competition."

He noted that it is crucial to discuss the issue now, and it is a positive sign that discussions have already begun in Europe, especially given the emergence of digital-based payment solutions such as Libra. Ducoulombier emphasized that while the European Payments Initiative has progressed and will continue to be welcomed, it is not a project designed and led by the Commission or EU institutions. To facilitate the progress these institutions are making, there needs to be a high degree of complementarity between payment solutions developed by the private sector and the necessary intervention by public authorities, which may require these solutions to occupy different segments of the market. (Finextra)[2020/10/14]

Similar restrictions will apply to the use of such accounts by non-residents.  In fact, it may also be that it is difficult for non-residents to open an account in the Eurozone without having a regular account with a bank.  Doing so avoids additional forex stress, speculation and forex exchange market volatility.  It should be pointed out that, in fact, the restrictions and restrictions in the form of account thresholds will not have a major impact on the lives of non-residents.  But it may work for visitors.

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One could argue that retail central banks are legally similar to cash in that the central bank is the direct counterparty, but in practice customers are less likely to see it as a cash substitute.  It is a new digital product that is, in essence, very similar to existing digital banking products.  Therefore, digital products will be close substitutes.  Some will worry that a retail CBDC will be seen as an opportunity to eliminate cash.  But, according to reports from the European Central Bank and other central banks, that is not the case.

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Mr Carstens explained the motivation of the project. First, many countries and regions have less developed payment systems, such as no instant payments. In these countries, an account with the same bank will make it easier to receive instant payments. Second, it may stimulate additional competition for innovation, including from the private sector. Third, some see direct access to "clearing of central bank funds" as a particular advantage. This is possible when paying with cash, although more and more people are opting out of cash payments. It should be noted that the choice of consumers and businesses to move funds digitally between their accounts rather than in cash is not constrained. In addition, if various countries and currency regions use the same standard to design retail CBDC, it is possible to further develop cross-border payment systems between currency regions.

(1) The biggest challenge is security and stability, including cybercrime risks and IT system failures due to technical factors.  Ministries in this area, public agencies and other central banks alike should cooperate broadly in an effort to integrate technological crisis response capabilities and the resilience of the foundations of pan-European system banks as online banking service providers.

(2) Denmark has started instant payment relatively early and has a first-mover advantage.

(3) For banks and public institutions, how to deal with anti-money laundering rules and customer knowledge requirements are facing huge challenges.  Significant resources have been invested in this field and the results may not justify the resources expended. But some contribution can be made by developing advanced digital systems that will better target joint efforts in this area with detailed payment information.

(4) Cross-border payments still leave a lot to be desired, especially when it comes to transfers to less developed countries, between European countries and even between countries in the Nordic region.  Work is in progress to resolve this issue.  The European Central Bank is developing Targeted Instant Payment Settlement (TIPS) to support multi-currency processing, and major Nordic banks are collaborating on the P27 project, which will also contribute in this area.

The following are some screenshots of the speech

By | PER CALLESEN

Source | THE EUROPA THINK TANK'S WEBINAR

Compile |  Xu Hejing

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